Should I Save for Retirement, College, or Pay Off the Mortgage Early?

So you’re on Baby Steps 4–6! Congratulations! You can finally focus on investing for retirement, saving for your kids’ college expenses, and even paying off your mortgage. These are all important goals, but there’s only so much money in the bank. Which of these tasks do you tackle first?

Let’s talk about it. I want you to have the right knowledge to take on your financial dreams!

Funding College vs. Retirement

One of the biggest dilemmas I hear about is saving for retirement versus saving for college. And that’s understandable. You want your kids to have every opportunity to succeed in life, and a college degree can play a huge role in making that happen. At the same time, you need to prepare for retirement. You can’t work forever, and you shouldn’t have to! So which one takes priority?

Read this very carefully: Your retirement comes first.

Before you put money into a for your kids’ education, you need to invest 15% of your gross income into a tax-favored retirement account like a 401(k) or a Roth IRA, every month, year after year. And the earlier you begin this habit, the more time you give compound interest to do its work.

Why do I stress investing over saving for college? It’s because your kids can apply for grants and scholarships and work their way through college. But when it comes to your retirement expenses, there is no scholarship or grant program, and there will come a day when you won’t be able to work. I want you to be prepared for that day.

Should I Save for Retirement, College, or Pay Off the Mortgage Early?

As your income grows and you have more wiggle room in your budget, you can put anything extra into a college fund. Until that time, your retirement fund is priority!

Now, what I don’t want you—or your kids—to do is take out student loans. In 2016, parent borrowers owed an average of $22,000 or more on loans they took out for their kids’ education.(1) People, that’s not okay!

There are lots of other options for paying for school. Don’t even consider student loans as one of them.

Retirement vs. Mortgage Payoff

Some people who are intense about getting out of debt wonder if they should go ahead and pay off their mortgage before they start investing the full 15% into retirement. That’s a great question, and I’m encouraged by people who are so committed to saying goodbye to debt once and for all.

Here’s the deal: You need to invest that 15% of your monthly income before you put any extra money toward paying off the house. Let me use an illustration to show you why.

John and Christina have paid off their debt except for their mortgage and have saved three to six months’ expenses in an emergency fund. They have $170,000 left on their 15-year fixed-rate mortgage for the home they bought three years ago. Their monthly payment is $1,500 a month. If they put an extra $500 a month toward their mortgage, they would pay it off three years and four months earlier and save around $11,000 in interest. Not bad, huh?

But if they took that $500 a month and invested it instead, they could have around $22,000 in three years, assuming a 10-12% rate of return. And here’s where it gets interesting: If they left that $22,000 alone for 30 years, they could have over $380,000 in their retirement fund (assuming the same rate of return). That’s the power of time and compound interest working together. That’s why you need to put away 15% a month toward retirement before you think of paying off the mortgage early.

Should I Save for Retirement, College, or Pay Off the Mortgage Early?

If you want to get serious about paying off your mortgage early—and I hope you do—look at other alternatives besides diverting money from your retirement savings. It’s a better financial deal all around.

You will tackle these three goals at the same time, but they don’t have equal priority. When you make your budget, retirement savings comes first. You need to invest 15% of your gross income every month—no excuses, no arguments. And that percentage does not include any employer match you might get.

After that, you need to set a goal for your kids’ college savings. Work with a financial advisor to make sure that goal is reasonable, and then determine how much you need to save each month to reach that goal. Now, that amount will be different for every person, and it will depend on how many kids you have and when they’ll go to college.

Whatever money is left over in the budget can go toward paying off the house. You might have extra if you don’t have kids or if you want your kids to fund their own education, so put that  toward your mortgage. Then, when you say goodbye to your house payment, you can throw everything into your retirement fund.

You might be asking, Why can’t I just put a little bit toward each of these needs every month to make sure I’m covering my bases?

Here’s why I don’t recommend that: Simply put, you’re spreading your money too thin to make a real dent in any of these accounts. And that’s especially important when we’re talking about your retirement future!

Should I Save for Retirement, College, or Pay Off the Mortgage Early?

How Can I Start a College Fund or Pay Off the Mortgage Now?

I know you want to do what’s best for your kids and invest in their future; and I know you want to say goodbye to that mortgage forever. If you are serious about those two goals, there are ways to tackle them without sacrificing your retirement.

First, look at your budget. What can you trim? You may have to sacrifice some extras like streaming services or subscriptions, but I’m betting you can find some places to cut back. Could you eat out less or carpool to work?

Second, consider taking on a side gig. If you worked a second job and put $1,000 away in a college fund every year for 15 years, you could have $35,000 for Junior’s college. If you got ambitious, you could hustle more than $1,000 a year (that’s less than $100 a month!). If you don’t want an ongoing side job, do a yard sale once a year and put that money into a 529 or ESA. The possibilities are limited only by your willingness to work!

The same principle applies to your mortgage payoff. Just be sure to check with your mortgage lender to see how they accept extra payments—and make sure those extra payments go toward the principle, not the interest.

Consistent Focus, Day After Day

Let me be really honest. There is no quick-fix, snap-your-fingers, win-the-lottery way to reach big money goals like funding retirement or paying off your house early. It takes time, consistency, focus and determination. But after you put in the effort, you’ll realize that the payoff was worth all the work.

If you’re ready to jump into investing but don’t know where to start, check out our SmartVestor service to get a list of professionals in your area who would love to work with you!

And if you’re ready to get serious about building wealth for your future, check out my brand-new book, Everyday Millionaires: How Ordinary People Built Extraordinary Wealth—And How You Can Too. You’ll be surprised at how the average net-worth millionaire made their money—and what you can learn from them.

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